3Com restructures in move to boost profits

The struggling networking firm will cut 150 positions and create a new unit to move its business into more profitable areas.

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3Com today announced it will cut 150 positions and create a new personal connectivity business unit, as part of its plan to move its business into more profitable areas.

As reported earlier by News.com, 3Com has been looking for a business boost amid a series of financial setbacks.

Under its new unit, the company will consolidate and streamline its traditional, but slow-growing networking card and analog modem product lines. The unit is designed to leverage 3Com's strength in those areas in an attempt to gain a leadership position in the emerging--and potentially more lucrative--high-speed Net access, home networking, and wireless markets.

"This is a bold action here because we've reinvigorated the organization around growth," said Jef Graham, senior vice president and general manager, who will oversee the new unit.

Wall Street analysts gave 3Com's announcement mixed reviews, however.

Warburg Dillon Read analyst Scott Heritage said the reorganization won't do much for 3Com in the short-term.

"The way they're organized is not an issue," Heritage said. "They can rename these things and have different products in different areas. But that's not going to change the fundamental problems. It's the market they're selling into and they're not growing that fast."

Previously, the technologies were in separate units, Graham said. But combined together, 3Com can create products that integrate the networking card and analog modem technologies, he said.

For example, 3Com is working to create a home networking appliance that will serve as a central server, or "gateway" that will allow consumers to connect their PCs and home appliances, Graham said.

"With cable modems, DSL, home networking, and wireless, we end up competing against different vendors, [like] Alcatel and Motorola, but we can combine the technologies into a simpler, integrated residential gateway," he said.

3Com's new unit will also combine its sales, marketing, and engineering capabilities into a single team to serve PC manufacturers. The company said this was done in "recognition of the growing importance of its PC OEM customers."

The announced job cuts will come mostly from the company's analog modem products groups. But the cuts also include workers from 3Com's storage area network unit, which was dissolved several weeks ago.

3Com today said it will redistribute another 150 workers to its high-growth product areas.

"You will see that it will improve profitability, and in the short-term, it improves morale and attitudes in the company. That we're investing in new areas. Engineers like to see new things going on," Graham said.

SG Cowen analyst Chris Stix said 3Com's restructuring was a smart move, but also questioned how fast new technologies, such as DSL and cable modems, would be adopted to help drive revenue for the company.

"Ultimately, this will re-ignite growth for 3Com. What's not clear to us is how fast revenue will ramp up for the company and make a significant contribution," Stix said.

Stix said creating a PC OEM organization was a good move because it could help grow 3Com's stagnant networking card and analog modem business. With a PC OEM organization, 3Com could strike more deals with PC makers, such as Dell and Compaq, to bundle 3Com's technology into PCs, he said.

Today's announcement expands upon 3Com's new strategy announced last month following a disappointing fiscal quarter.

3Com executives at the time said they planned to move away from the company's classical strengths in networking cards and analog modems, to focus efforts on nascent but fast-growing markets, including Internet telephony and the company's successful PalmPilot line of handheld devices.

3Com has been mired in financial troubles lately as prices and sales of modems and networking cards have dipped, while its stock price has plummeted from the mid-50s in January to the low 20s this month.

In March, 3Com reported weak quarterly results, posting revised earnings of 24 cents a share. Although the numbers beat revised analysts' estimates, they fell below Wall Street's original consensus estimates of 36 cents.

3Com's struggles are magnified by the continued success of some of its traditional competitors and new rivals, like Cisco Systems and Lucent Technologies--underscoring the notion that finding the right niche can result in high returns in the networking business.

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